Bid-Ask Spread
Definition
The bid-ask spread is the gap between the highest price buyers are willing to pay (the bid) and the lowest price sellers are willing to accept (the ask, or offer). A market maker buys at the bid and sells at the ask, earning the spread as compensation for providing liquidity and bearing inventory risk.
The spread is the classic proxy for liquidity: heavily traded large-cap stocks and on-the-run Treasuries trade with spreads of a penny or a fraction of a basis point, while small caps, high-yield bonds, and distressed paper can have wide spreads. Spreads widen with volatility, uncertainty, and adverse-selection risk (the fear of trading against better-informed counterparties).
Why interviewers ask
Sales & trading interviews use it to test market microstructure intuition — 'why do spreads widen in a crisis?' — and it appears in banking contexts too, since illiquidity discounts and block-trade pricing are rooted in the same economics. Knowing that a market maker's edge is the spread, offset by inventory and adverse-selection risk, is the expected answer.
Related terms
Interviews don't test definitions — they test recall under pressure.
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